Industry needs different level of support in new oil age

Kim Davies writes that governments must realize new recovery methods are capital intensive

By Kim Davies

October 31, 2011

In the summer of 2007, I went out to raise money for a new private company, Martin Head Oil & Gas. I was lucky with my timing. In September of that same year, the Alberta Royalty Review Panel delivered its final report and the petroleum world in Alberta tilted on its axis. I knew of six start-up oil and gas companies on the road at the time the royalty report was released and only one got the funding they needed. One could hear the howls of shock as investors questioned how an apparently civilized place like Alberta could just change the rules without notice, like some developing world potentate.

Obviously the political environment we operate in is critical to the oil and gas business. Now Alberta has a new premier in Alison Redford and we will wait to see the direction she takes the province in and the subsequent consequences. Of course, there is an election coming so the new long-term government is still to be established. The other possible leader, based on polls, is Danielle Smith of the Wildrose Party. Both seem very supportive of the oil business, which is positive for Alberta. The fact is the world needs more energy and that takes substantial capital investments. And capital investors want a stable environment. But more than stability is required; the government must recognize that the new “oil age” requires different support than what was provided in the past.

That’s because the easy cheaper stuff has been found. The industry has now moved on to developing more challenging and costly sources of oil and gas. The technology necessary for shale gas development took 25 years to perfect. The actual large-scale development of the oil sands is less than 15 years old, aided by increasing oil prices, but also tax reform and less government intervention.

This brings me back to my story about Martin Head. Back in 2007 we had planned to conduct projects in Alberta and Saskatchewan but decided very quickly to concentrate on Saskatchewan whose royalty regime was so much more favourable than Alberta’s. Today, that is still the case.

At Terrex Energy, we are focused on enhanced oil recovery (EOR) in existing mature pools, another development process that has substantial new reserve potential. Like the oil sands, but on a smaller more flexible scale, companies pursuing EOR need significant upfront capital and they benefit from a royalty scheme that supports such a development process. Alberta has a special EOR royalty, but it is not as attractive and straight forward as Saskatchewan’s. Premier Redford sounds like she is willing to be flexible when it comes to royalties, stating that “we need to work with industry to ensure it can optimize its ability to be successful …. allowing adjustments, when needed, to the royalty regime along the way.” Ms. Smith has expressed similar sentiments. It sounds encouraging but I will be interested in determining what both leaders really mean.

Beyond royalties, I see three other key issues facing the oil business and both leaders appear to recognize them. We need ways to move our oil to new markets so we are not “landlocked.” There is a need to push the federal government to allow more immigration of skilled workers to handle the work the oil and gas industry wants to do and to keep labor prices under control. Finally, the new premier must be an ambassador for Alberta both in Canada and elsewhere for those who do not recognize the benefits our province’s resources bring.